Project: Renovation of an office building, Senaatti Kiinteistöt, in English Senate Properties
Senate Properties Ltd is a public utility company producing services primarily for the Finnish government. Altogether Senate Properties owns 10,200 buildings and its revenue in 2014 was €625 million.
Demand: Feasibility analysis and target setting for a renovation project
Offering by Boost Brothers: Project development and construction management
The Real option approach, a new method for feasibility analyses and target setting for renovation and construction projects, is gaining interest in the construction sector. The new approach was also utilized by Senate Properties in a renovation project of an office building.
The demand for renovation projects originates from the changing requirements by customers, which usually results in unoccupied or underutilized buildings. During the past year, real estate owners have started discussing how to execute renovation projects in a way that would support the flexibility of space. The adaptability can inhere significant possibilities for increasing rent incomes of facilities if the utilization rate of buildings can be raised.
In this case for Senate Properties, the greatest uncertainties were related to the tenants’ future space needs. These insecurities can be managed with flexibility, in which case the additional costs can be easily calculated. However, the financial benefits of flexibility are difficult to define with traditional cash flow statements, because the future space needs of tenants are difficult to predict.
As a recent solution, the new real option approach has been started to use in target setting and feasibility analyses of investments. According to studies and practical implementations, the real option approach is much more suitable for analyzing the feasibility of uncertain investments than traditional cash flow analyses.
The Real option method developed by Boost Brothers is an internationally unique model that was developed in a Finnish R&D program. The approach can be used to support the cash flow analysis, and it aims to ensure that the utilization rate of buildings stays high after renovation investments.
Senate Properties used the real option approach to define risk profiles of their tenants, which made it possible to identify the development of tenants’ space demands for the coming decade. The method was also utilized in the planning of renovation investments.
The Real option method enabled the real estate owners to focus their investments where they were most needed, instead of making the building completely flexible. In addition, the financial benefits for user organizations (the tenants) were calculated – also the tenants benefit from flexibility, because they don’t have to pay rent for unnecessary space.
The investment manager of Senate Properties, Anne Linnainsaari, describes the process as following: “We noticed that the actual benefit of the approach was the systematic process and management of uncertainties that included professional opinions of tenant risks. In addition, it was of great importance that the generated benefits for the customers were also documented in the real option approach”.